Crisis of Confidence by Default

The “Voice of Euro zone” has been quietly subdued by the countercyclical fear of defaults! And the economic powers are becoming pitiful being at the end of their resources.

The grandeur seems to have been short-lived and failed to reach the magnificence of a United States of Europe! Yet, one shall keep in hope alive as crisis often do wonders, though seldom astounding.

Continued fiscal doldrums in Euro zone has literally put countries in crisis of confidence by the panic of default- the very same dialect which USA has avoided by hook-and-nook, just a few weeks ago, with much pain still left behind. The theory of growth now lays “much in paper than in practice” which remains confined to mathematical theorists of growth. The actual growth in the Euro zone in entirety has been of one such nonplus 1.1%.

Ideological Divisions

And now, the whole of the EU continent has been holed up in debt crisis. Lack of prudency in monitoring fiscal balances and failure to move on sustainable fiscal track aided by mismanagement of public debt has led to political turmoil shaken up by economic crisis, which at present, strictly undermines the confidence of the euro zone currency- and the European Union, by itself. The rise of disparity due to differences in governance, political and ideological both, over bond purchases which has taken its first toll in Juergen Stark, who resigned from the ECB governing council, is giving a hard time to policy makers- in one of the hardest of times the EU ever faced since its conception. The ECB’s purchase of troubled nation’s debt that has somehow given an opportunity to escape from the blunt of the fiscal debacle for those countries counting their untenable and mountaineering debt has indeed created a political firestorm giving policy-makers a run for their pedagogical opinions. Political and ideological divisions at the independent ECB has taken a front seat that mellows down on the rationality of backing those member countries with bailout funds until its own treasury gets exhausted! Those Countries who were listening in silence and observing in despair, now, have become more thoughtful than usual, and are much active in charting out in what could be the worst case scenario.

The subject of recurrent bond purchases almost concealed a serious import of “wholesale” fiscal calamity, although the balance of perception has been relatively on the default side. Ever since the euro came into existence, it has been under some kind of attack-whether speculative or from systemic crisis, whilst the present bond market meltdown have placed it under existential threat.

There have been some genuine causes behind such ideological imbalances. As Prof. Krugman has rightly pointed out, that the policy makers did a pathetic job of targeting inflation rather than monitoring fiscal balances whereby, (inflation) actually never posed a greater problem than the problem of default itself. They would have acted in anticipation in devising deficit-cutting measures as a “priori” and hence the questions arise- of what were the three musketeers (ECB, IMF, and the EC) doing all through these two years of euro-zone crisis as mariners and foreseers who failed to see a much deeper yet impregnable trouble? People know what the IMF was going through-fighting scandals. But what about the other two? Sleeping?

Well, the real thing is, you need to blame the government policy makers ‘even’ if they were right, and yet, must hold them responsible when they are wrong. It’s a great paradox, the greatness, which cannot be hired by default!

Oration of Aid and Sermon of Charity!

Well, I do not want to condemn in haste without taking into consideration of the adjacent circumstances in foretaste.

In effect, they (the ECB) did just one thing, undoubtedly (in) sensible, to maintain price stability, but they also failed to anticipate some sort of fiscal calamity that would undermine the real efficacy of those EU policy practices. And what are they doing now? Buying up bad debts to prevent crises of the states! Indeed, that is their ‘Sermon of Charity’, backed up by “Oration of Aid” at present. Now, I do think that they really need to rethink on their inflation targeting monetary policies yet over and in entirety again.

A central institution like the ECB is predestined to posses’ variety in judgment and diversity in policy making. The trio seems to have forgotten all these norms of normative policy practices since they singled out a simple policy of targeting inflation, that’s all, and though it was indeed questionably necessary, over and above, what was required to be mandated-a monitoring of the physical health of euro zone states, which was however, ignominiously ignored. And now, the situation has molded up in such grandeur that it has really become tricky to decide “whom to attend and who to leave out”. The ECB until now has bought €135 billion worth of bonds of Italy, Greece, Spain, Ireland and Portugal. It is now faced by the “dual dilemma” of restructuring Greece’s public debt along with buying Italian and Spanish bonds. Greece, as euro zones’ weakest debtor, has already received €110 billion as bailout, and more may be in the offering.

So now, as I have already mentioned in my review a couple of weeks earlier, don’t expect asperities of austerity. That won’t work.

The ECB have already provided preventive credit lines but those were not enough to immunize against such dreadful disease of default! With fear of default that risks investor capital flight and run on the banks, less attractive becomes a country’s bonds to already unwilling investors unless offered at a very high interest rate. What would have made those bonds attractive, if ever backed-up by proactive govt. measures to infuse new life in those ailing old economies, was never a distant prospect, neither a far-flung nebulae. A trouble-free strategy of maintaining budged deficits was all that was mandated as an obligation to maintain the value of the euro zone currency, as well, the value of the member states themselves. What was required was to oversee the structural issues underlying the origin of fiscal imbalances and mounting debt, by reexamining the path over which the fault line has passed- by resolving issues related to stagnating growth, and by judging things with commitment.

Shouting "impeccable, impeccable" won’t resolve systemic crises. A pure instance of such impeccability is the present state of affairs, which is indeed an impeccable sample by itself.

In effect, it’s the same old idiom-“growth” herein and over again which rules the board and displaces the weak for the mighty. Neither is any hope for Dennis Robertson’s once reproached chance of reviving foreign trade as an engine of growth in Euro zone-barring Germany. Error of irrelevancy is sharp as it reminds me of a theory once in ardent demand, and once successful enough- Rostow’s ‘takeoff’ induced by innovation drive back in the 19th century in the US as a sharp rise in savings rate which had been much critical for economic growth, and which is much relevant at this moment. Vintage things don’t age faster than new stuffs. And so, new stuffs are discarded as quickly as they are introduced. But it’s these new stuffs that once do indeed become priceless vintage!

And hence, it seems that the great Western powers are loosing out in the “art of competitive innovation” to their sister Eastern concerns- to China in great extent and to India, in some measures. Yet, you can’t blame these two righteous competitors since these two are beautiful places for learning about real growth to begin with, and more generous place for them to end in.

Sources: IHT, NY Times, Economic Times